Asia Trader’s Strategy Guide for Playing the US Debt-Ceiling Debate

Strategists have begun to position clients for an outcome, pointing to 2011 when S&P Global Ratings downgraded the US credit rating as talks imploded. The playbook includes traditional havens of yen, gold and Swiss francs as well as more creative trades such as going long on the Indian rupee and South Korean bonds.

“The continued political showdown to raise the $31.4 trillion debt limit raises questions about whether the US is truly a risk-free issuer,” said Hilde Jensen, head of fundamental equities at Nordea Asset Management. Shares initially declined before rebounding. Regardless of the rating agency’s decision, we are prepared to face volatility in Asian equities over the next few months.”

The House of Representatives on Wednesday passed a Republican-backed debt ceiling bill, intensifying a standoff with the White House which opposes the legislation. The bill has no chance of passing the Democratic-controlled Senate.

Here are some trades that the strategist recommends for Asia:

yen, gold

Both the yen and gold advanced after S&P took a negative outlook on its US credit rating in April 2011, and climbed again in August following its downgrade. The Bloomberg Dollar Spot Index also gained after the rating cut amid broad haven demand.

Nomura Holdings Inc., including Craig Chan in Singapore. Japan’s currency could outperform if the prospect of a US default rises, strategists at the US wrote in a research note last week. Traders would expect a default to be short-term, raising the odds for a US rate cut in 2024. With Treasury yields lower, the yen will benefit.

Whether or not the dollar rebounds like in 2011 is debatable.

Khun Goh, head of Asia research at Australia and New Zealand Banking Group Ltd in Singapore, said the dollar may not benefit from haven demand this time around in the event of a prolonged government shutdown or credit-rating change. “Traditional safe-haven assets such as gold, the yen and the Swiss franc are the most likely to gain.”

quality stock

The VIX index, a measure of expected volatility on the S&P 500 index, fell last week to its lowest level since November 2021, suggesting that for stock investors at least, fears about the debt-limit are over. Remains silent. This potential devaluation of risk could mean that the market is ready for bigger moves if concerns begin to mount.

Back in 2011, Asia’s high-quality stocks outperformed defensive sectors from July to September, said David Chao, global market strategist for Asia Pacific at Invesco Asset Management Ltd. in Singapore. “Asia-Pacific market participants should prepare for tightening liquidity conditions in the US as the debate rages on.”

Asia High Yielders

According to some, should the dollar decline, that could provide a headwind for high-yielding currencies like the rupee.

India’s currency stands out because of its low volatility and high carry, which makes it attractive, said Ray Sharma-Ong, director of investment, multi-asset solutions at Aberdeen Asia Ltd in Singapore. Korean bonds could also benefit, especially given signs the central bank will pause its tightening cycle, he said.

Investors boosted holdings of bonds from Korea, Indonesia, Thailand and India during the peak of banking turmoil last month, demonstrating confidence in emerging-Asian debt despite broader market volatility.

Any initial increase in volatility or risk aversion is likely to be a negative for Asian bonds if the debt-negotiation impasse, according to Nomura, but they will rally once resolution is found. “High-yielding Asian rates such as India and Indonesia are likely to outperform as sentiment improves globally,” the strategists wrote.

buying opportunity

In the past, Republicans and Democrats have always managed to reach a solution to avoid a government default. Assuming that will happen again, any selloff in risk assets before then can be seen as a buying opportunity.

Invesco’s Chao said, “Investors should prepare some dry powder to buy assets that may become oversold during this period of volatility,” as with emerging-market and small-cap stocks in the past debt-ceiling debate. Happened with

The text of this story is published from a wire agency feed without any modification.